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New Tax Breaks Benefit Millions

What you need to know

The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.

Child tax credit (CTC)

  • The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
  • To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
  • If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
  • You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.

Child and dependent care credit (DCC)

If you and your spouse work and have children in daycare, or have an adult that you care for, you may be eligible for a larger tax credit in 2021.

  • You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit. This results in a maximum credit of $4,000 (up from $1,050).
  • If you have more than one qualifying dependent, you can spend up to $16,000 in dependent care expenses and get a 50% credit. This results in a maximum credit of $8,000 (up from $2,100).
  • To receive the full tax credit, your adjusted gross income must not exceed $125,000.
  • Dependents can include people of all ages, not just kids, as long as they meet the dependent qualifications.

Earned income tax credit

  • If you’re a household with no kids, the maximum earned income tax credit increases from $543 to $1,502.
  • More taxpayers qualify for the credit. The lower age limit for receiving the credit decreases from age 25 to age 19. The upper limit of 65 for receiving the credit is eliminated. There is no upper age limit for 2021.
  • You may use either your 2019 income or your 2021 income when calculating your credit to obtain the maximum credit.

Stimulus checks

  • A third round of stimulus payments in the amount of $1,400 is being sent to qualified taxpayers.
  • The payment phases out for income over $75,000 for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married couples.

Action to take

  • Look for updates on the advance payments for the child tax credit. The IRS is sorting out how to get half of your child tax credit to you in 2021. Stay tuned for updates as to whether the payments will begin in July or if they will be delayed. You may also opt out of this early payment, but will need to wait for instructions on how to do so.
  • Consider increasing dependent care expenses. Look ahead to the rest of 2021 and consider if you should increase your dependent care expenses to take advantage of the significant increase in this credit. If you increase your dependent care expenses in 2021, remember you won’t be able to include the same amount of expenses when calculating your credit in 2022, as this tax credit increase is currently for 2021 only.
  • Conduct a tax forecast. With the dramatic increase in these credits, you may want to estimate next year’s tax bill. It may make sense to adjust your withholdings to account for a lower tax obligation.
  • Be conservative when forecasting your earned income tax credit. It is uncertain how the expanded earned income tax credit will impact those over 65 when you have no children. For example, are Social Security benefits considered earned income when calculating the earned income tax credit? Does the larger standard deduction for those over 65 affect the earned income tax credit calculation? Until clarification is issued by the IRS, you may wish to be conservative about the credit amount you’ll receive.

Answers to Common Tax Questions

With the April 15 tax filing deadline right around the corner, here are answers to some common tax questions.

  • When will I get my refund? The pandemic and additional stimulus payments will, in all probability, delay refund payments. But as of now here are the old wait times to receive your refund.

    * E-file return with a direct deposit – 1 to 3 weeks

    * E-file return with a mailed check – 1 month

    * Paper file return with a direct deposit – 3 weeks

    * Paper file return with a mailed check – 2 months

    NOTE: If you want exact information on the status of YOUR refund go to www.irs.gov/refund and follow their instructions.

  • What’s the most common delay in completing a tax return? Missing items! W-2 and 1099 forms are some of the most common tax documents to go missing. If you have multiple jobs, whether full-time or part-time, you’ll be getting multiple documents in the mail. It’s easy to lose track of all these documents if you don’t have one place you put them once received.
  • Can I still get a stimulus payment? If you’re still waiting on either the 2020 or 2021 stimulus payment, file your 2020 tax return and claim the Recovery Rebate Credit. This is why it is important to keep track of any payments you receive from the government during the year. You will need them to account for any missing payments or underpayments.
  • Can I correct a tax form that has an incorrect dollar amount? If you receive a tax document with incorrect information, contact the company that issued the document and try to get it fixed immediately. If you can’t get a corrected form right away, include both the incorrect form and the correct dollar amount when turning in your tax documents to have your return prepared.
  • Can I deduct charitable contributions if I don’t itemize? In 2020 you can claim a $300 charitable contribution deduction regardless of whether or not you itemize your deductions. If you missed this window of this above-the-line donation in 2020, never fear as it is also available in 2021 with an increased limit to $600 for married couples. So, save those donation receipts!
  • Is this taxable? While there are always exceptions, the most common taxable items that are questioned include unemployment benefits and withdrawals from non-Roth retirement accounts. Some things, like Social Security, are often, but not always, taxable.

Help! My Stimulus Payment is Wrong or Missing!

Millions of Americans already received their economic impact payment. But what if you’re still waiting or your payment was for an incorrect amount?

Here are some common scenarios why you may not have received your payment, or the payment you did receive was for an incorrect amount, and what you can do.

  • Your payment was sent to a closed bank account. If you didn’t update your banking information or mailing address before your payment was processed, your money will probably end up in the wrong location.

What you can do: You probably must wait. If your bank account on file with the IRS is closed or no longer active, the bank will reject the stimulus payment deposit and you will be issued a physical check to the address the IRS has on file for you.

  • Your check was sent to a wrong address. The IRS will send stimulus checks to the mailing address listed on your most recently-filed tax return. The IRS will also mail a letter with information about how and where the stimulus payment was made, but this letter will go to the most recent address on file.

What you can do: Change your address on file with the IRS by filing Form 8822. While it won’t solve your immediate problem, your change will correct future issues. In the meantime, keep tracking the status of your payment by visiting the website Get My Payment. You can also try and contact the new people who live at your old address.

  • You didn’t get paid for your dependents or you think your check amount is incorrect. You are certain that you should have received a full $500 payment for each qualifying dependent and the payment was either not received or was for an incorrect amount.

What you can do: If you did not get the full amount you think you should have received, you will be able to claim the additional amount when you file your 2020 tax return.

  • You received a check for a deceased relative. With more than 300 million people living in the U.S., it probably shouldn’t be a surprise that some of the stimulus checks were mailed to deceased individuals. Unfortunately for living family members, you can’t keep this money.

What you need to do: You should open the check, write VOID on the check and then return it to the IRS. If the payment was via direct deposit or a check received from the IRS was already cashed, you should write a personal check to the IRS to return the money.

Receiving the wrong amount of money in your stimulus check or not receiving a check at all can be very frustrating. But be reassured the IRS is doing everything it can to help you get the correct amount of money that you deserve.

More information: If you have other questions or concerns, the IRS has a question and answer resource. Click here to read through the IRS Q&A.